During the past decade, institutions having loans on their balance sheets have moved from a “hold to maturity” philosophy to a proactive portfolio management model. The larger, more sophisticated institutions first adopted the proactive portfolio management model, and this popularity of this model has migrated down to smaller institutions. Managers of such proactive portfolios, such as executives, often are concerned with four issues: liquidity, capacity, exposure, and credit risk. Such executives are increasingly recognizing the emerging secondary whole loan market as the appropriate mechanism for managing these concerns.
The secondary whole loan market is in its infancy, however and still lacks necessary efficiencies and liquidity. Trading and originating commercial loans currently is handled in a costly, labor-intensive, and time-consuming manner. The lack of a centralized clearing mechanism for commercial loans hampers both sellers and buyers of commercial loans.
Executives and other sellers of commercial loans face a number of obstacles. For example, the commercial loan market is fragmented and has no central clearing mechanism, making it difficult to locate the best buyer for a given loan. Frequently, executives are unable to inform more than a few buyers about a commercial loan opportunity. Such limited distribution of opportunities limit the efficiency with which a transaction can occur and can result in a seller not achieving the best price or terms for the sale. In addition, lack of historical transaction data impedes the ability of parties to a transaction to price assets quickly and accurately. This makes the analysis of a sell decision inefficient and time-consuming.
Even if executives overcome these obstacles, usually there is a long delay between the decision to sell and the actual execution of the sale, further complicating the process and increasing the risk of not achieving the required sale price. The inefficiencies and lack of internal resources often force executives to make less desirable decisions. For example many parties allocate internal resources to make the necessary divestitures to maintain liquidity or asset/liability maturity requirements. The parties often turn away potentially profitable new loans because of geographic, product, or borrower diversification purposes. In the case of sub or non-performing assets, the remaining choices are to employ expensive and time-consuming workout strategies or do nothing.
Investors trying to acquire loans run into many of the same problems described above. Investors also incur significant time and dollar expenses performing acquisition due diligence, and run into supply limitations due to the unpredictable nature of deal flow.